Taxing Rental Versus Taxing
Salable Value of Land
Harry Gunnison Brown
[Reprinted from the Journal of Political Economy,
Vol. 36, No. 1 (February, 1928), pp. 164-168]
A question which is, in the opinion of the present writer, worthy of
some discussion is whether a tax on the rental value of land is the
exact equivalent of a tax (at, of course, a sufficiently lower
rate)[1] on the salable value, and, if not, whether there is any
significant difference in effect between such taxes.
The first point to be made is one with which the reader is probably
quite familiar. It is based on the recognized relation between the
rental and the salable value of land. That the salable value of a
piece of land is arrived at by the process of capitalizing its
expected future rents is generally recognized. A tax on rent high
enough to take all the rent land was yielding, and which was
confidently expected to continue to take all the rent throughout the
future, would make the salable value of the land zero. Hence, no
finite rate of taxation on the salable value of land can possibly be
high enough to take all the rent. The indicated solution would seem to
be, in case it is desired that taxation shall absorb all the rent, to
base the tax on the rent or rental value, (at a rate of 100 per cent)
and not on the salable value.
Yet it might be administratively possible to levy a tax equal to 100
per cent of the rent while still levying it ostensibly on salable
value. There would be, in the market, in the theoretically perfect
case, a zero salable value. But assessors could put upon land a
constructive salable value to be arrived at through capitalizing the
rent which would be received by a private owner if the land were not
taxed.
There is, of course, a difference, even in the taxation of rent,
between taxing only the rent actually received from a piece of land
and taxing its rental value. In the one case, no tax is levied on land
held out of use for speculative or other purpose, however high may be
the rent which such land would yield if used. In the other case the
tax on unused land from which no rent was being received by the owner
would be as high as if the land were yielding its entire potential
rent. Hence, in this latter case there would be a definite penalty
against the holding of valuable land out of use.
The question which is here chiefly to concern us is whether a tax
based on salable value would be the same and would have the same
effects as one based on rental value. It is obvious that either -- and
in the case of rental value the fact has just been commented on herein
-- differs from a tax on actually received rent, by virtue of its
falling on unused, as well as on used, valuable land.
Clearly there is no difference between a tax of 100 per cent on
rental value and a tax on "constructive"[2] salable value
levied at a correspondingly high rate. Or, in other words, it would be
possible to levy a tax on such "constructive" salable value
at such a rate that it would be exactly equivalent to a tax of 100 per
cent on the annual rental value.
However, due consideration will disclose a difference between an
actual salable-value tax and a rental-value tax if not all but only a
part of the rent is taken. For a tax on rental value means that
marginal and below-marginal land is not at all taxed, since such land
not only yields no rent but has no present rental value. On the other
hand, a tax on the salable value of land does mean that land at or
below the margin -- or, at least, some of such land -- is taxed. For
there is some land which, although not now capable of yielding rent,
will, it is confidently expected, yield rent in the future. And this
expected future rent is capitalized into a present salable value. Any
piece of land, no matter how poor from the viewpoint of present use,
may have a salable value based on estimates regarding its future.
It may be thought that in the foregoing considerations lies serious
objection to the use of a tax on salable value; that a tax on the
salable value of land, since it rests in some degree on marginal and
even sub- marginal land, might be shifted, at least in part; and that
a tax on rental value is much to be preferred.
The difference in practical effect between a tax on salable and one
on rental bare-land value is, however, with certain possible
qualifications, to be mentioned at the end of our study, unimportant
or negligible. And what difference there is does not seem to be
clearly against the tax on salable value. Let us consider the problem
point by point. The first consideration seems to tell rather in favor
of taxing salable as against rental value. When land is speculatively
held, this is likely to be for the reason that its value is thought to
be rising. In such a case, the salable value is usually higher than
the current rental value will justify, being based largely on the
expected larger future rent. To tax salable value, therefore, tends to
tax at a somewhat higher rate land held out of use for speculation
than to tax rental value. This will the sooner force speculators to
disgorge. Of course, where the land held out of use is below or barely
at the margin of use, such speculation is, if not entirely harmless,
at worst relatively so. And where it is well above the margin a rental
value tax, if at a high rate, would sufficiently discourage
speculation.
What, now, of the difference between these taxes in the case of land
which is used? In this case, too, the prospect of a higher future than
present rental value will make a tax on salable value relatively the
higher. (Though, also, a prospect of lower future rent would make it
lower.) But this will involve no additional burden to the user of such
land, as user, although the owner, as such, pays a somewhat higher
tax. The owner cannot charge as rent, to a user, any more in the one
case than in the other. Nor will there be any additional burden to any
prospective purchaser of the land. For the higher tax, present and
prospective, on a piece of land the rental value of which is expected
to rise and whose taxable salable value is, therefore, higher, will be
capitalized into a somewhat lower salable value for the land than such
land would otherwise have. For whenever the expectation of a rise in
the value of a piece of land is widespread enough to affect its market
value (which is whenever it affects the estimates of two competing
potential owners, of whom one may be the actual owner), this
expectation must, if assessment is based on actual market value and is
known to be so based, carry with it also the expectation of the
corresponding future and near-future taxes. The expectation of these
higher taxes will keep the land from rising as high in value as it
would rise if only the higher future rent, and not the higher taxes
due to their being based on the higher salable value of land, were
envisaged by owners and prospective buyers of the land. Obviously the
very fact of a higher rate of tax on such land will in some degree
lower the salable value on which the tax is based, but the
capitalization of whatever part of the expected larger future rent is
not to be taken in taxation will make the salable value of land the
rental value of which is expected to increase, higher than that of
land the rental value of which is expected to be constant or to
decrease, and will so make the tax on it higher compared to the tax on
such other land than if the taxes were based on rental value.
We conclude, then, that to tax salable value instead of rental value
cannot discourage the use of land which is expected to yield higher
rent in the future and which is therefore assessable at a higher value
than its present rental yield would justify. It cannot so discourage
the use of such land for, first, it discourages speculation in the
land (holding it unused) even more than would a tax on rental value;
second, it cannot enable owners to charge more rent to tenants, and,
third, prospective purchasers can buy it at a sufficiently lower
price, because of the capitalization of the higher tax, to offset the
burden of such increased tax.
To tax salable rather than rental value cannot even discourage the
use of marginal (i.e., no-rent) land although, in case the land in
question were expected soon to be above the margin the former system
would cause it to be taxed now and in the near future and the latter
not until rent began really to emerge. If the would-be user of such a
piece of land is unwilling to buy it, the tax does him neither good
nor harm. The owner gains nothing by letting it be used as against
holding it out of use, since, the land being marginal, he can charge
no rent. But, as we have seen, as soon as the land comes to be the
least bit above the margin, to tax it on the basis of salable value
(when the entire rent is not taken) puts more pressure on the owner to
let his land be used than to tax it on the basis of rental value. And
in case the would-be user desires to buy the land before using it, the
owner will sell it for a lower price if the tax is on the basis of
salable value than he would if it were on the basis of rental value.
Nor will it do for a possible objector to say that marginal land is
not worth using if the owner must buy it. For the price the buyer is
paying is not given for present-use value but is given for the
privilege of enjoying rent from the land in the future when, he
believes, the land will be above the margin of use.
Our general conclusion can be stated in a very few words: There is a
difference between a tax levied according to rental and one levied
according to salable value. But in neither case is there any
shifting.[3] A tax on salable value, no more than on a tax on rental
value, resembles, in this regard, a tax on land according to area (an
acreage tax) notwithstanding the fact that a tax on salable value
involves some tax on some land which is, at the time, of marginal or
lower grade. And neither a tax on rental nor one on salable value
discourages the use of land. While both tend to encourage such use by
making speculative holding unprofitable, the tax on the basis of
salable value, when only part of the rent (considering an average of
present and future) is taken, tends to discourage speculation even
more than the tax on rental value. On the other hand, objection might
be raised to the tax on salable value as being relatively burdensome
to owners of marginal or near-marginal land having, thus, no present
rental yield or an insignificant yield, but which land, because of
real or imaginary speculative possibilities, might have a considerable
salable value.
FOOTNOTES AND REFERENCES
- Thus, if rent is capitalized
into salable value on a 5 per cent basis, a piece of land
yielding, and expected to continue to yield, just $100 a year
would be worth, if half the rent were taken in taxation, $1,000. A
5 per cent tax on the salable value would also be a $50 tax.
- See above.
- See, however, qualifications
in the writer's book, The Economics of Taxation, New York
(Holt), 1924, pp. 221-32. These qualifications the writer had
previously discussed in an article, "Is a Tax on Site Value
Never Shifted?" published in the Journal of Political
Economy for June, 1924.
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